With 278 million subscribers, Indonesia is the 4th largest

mobile market in the world. It is also in the world’s top ten

3G markets, with broadband users skipping fixed
connections and going straight to mobile (just as they did
before with voice telephony). The rapid move to
smartphones means the mobile operators are also key
players in the internet sector, though note that 2.5G mobile
technology is still remarkably widespread. Fixed broadband
lines only feature at the top of the market, targeted at
businesses and high-end consumers.
One of the world’s largest mobile markets
The Indonesian telecoms sector is first and foremost a mobile market, and
the 278m mobile subscribers completely overshadow the 9m fixed lines and
12m fixed-wireless subscribers. So any discussion of telecoms in Indonesia
inevitably has a primary focus on mobile.
At a headline level, the Indonesian mobile market is characterised by:
• Prepaid (98% of subscribers are prepaid users)
• A huge data market (115m data users in 2012)
• Rising data revenues (already over 30% of the average user’s spend)
• High volumes of messaging and mobile ads
Growth was rapid throughout the 2000s, with the subscriber base growing at
an average of 37% per year from 2005. The market hit its saturation point in
2010 as penetration hit 100%, and as a result growth slowed down to 12% in
2011 and 2012.
While underlying growth is forecast to continue in mobile (130%
penetration – 330m mobile subscribers – is the consensus forecast for 2015),
the main focus of the mobile operators is now to drive the growth of data
subscribers and the associated data revenues.

Having shown you the big numbers, we should also add a caveat: one of the
unusual characteristics of Indonesia’s mobile market is the ubiquity of
multiple SIMs. Many subscribers hold two or three active SIM cards – and
often own two or three phones. People do this in order to find the best signal
quality (for higher end subscribers) or the cheapest prices (for lower end
subscribers). So the number of unique users in Indonesia is actually around
165m, which means on average each user holds 1.7 active SIM cards.
Rapid shift to smartphones and 3G
While Blackberrys have long been extremely popular (Indonesia was
Blackberry’s third biggest market in 2012, after the US and UK),
smartphone growth really took off in 2010 as the price of Android
smartphones fell below US$200.
Growth since 2010 has been rapid, and at the end of 2012 there were 33m
smartphones in Indonesia, representing 15% of all handsets. We believe this
will grow quickly over the next three years, since by early 2013 the price of
the cheapest Android smartphone in the market had already fallen to Rp.
499,000 (US$51), which is easily affordable for many Indonesians from the
C social class (and is within reach of even the Ds). Note that the mobile
operators do not subsidise handsets like they typically do in the US and
Europe.
By 2015, the consensus forecast is that smartphones will represent around
40% of all handsets. This means around 75m smartphones will be bought in
Indonesia in the next three years. (And at this point we would like to note
that pretty much every smartphone forecast around the world over the past
three years has been an under-estimate).
The 3G services market is already sizeable, and was ranked the 10th largest
in the world in 2011. The mobile operators are pushing data services very
strongly, backed up with huge advertising budgets, and helped along by
falling device and subscription prices. All the big three operators –
Telkomsel, Indosat and XL – have stated that stimulating growth in data
services is now their top market priority.
But feature phones and 2.5G still matter, and both are
full of innovations
Although smartphones are growing rapidly, feature phones will still
dominate the installed base for the coming five years. There are currently
180m active feature phones in Indonesia, and by 2015 there will still be
140m feature phone users.
These phones are usually connected to the internet via slower 2.5G
connections, and use simple browsers such as Opera Mini. However, it
would be a mistake to think these users are unsophisticated. It is simply
fascinating to watch a salesperson from one of the hundreds of stalls in
Jakarta’s Mangga Dua electronics mall take a thirty dollar feature phone and
within minutes have it running Facebook, Twitter and WhatsApp while also
providing the owner with the capability to surf the web from anywhere with
a mobile signal.
The fixed network serves the top end of the market
The number of fixed connections in Indonesia has slowly risen from around
9.7m lines in 2005 to nearly 11m lines in 2012. Customers are primarily
businesses and institutions, concentrated in the major cities, who use fixed
lines to obtain the high broadband data speeds required to run their
organisations.
Fixed wireless connections grew in the late 2000s as part of efforts by
Telkom and Indosat to increase fixed line penetration in outlying
geographies, and peaked at 18.7m users in 2010. This technology is now in a
slow decline as customers move over to a full mobile service, and had
around 14m customers by the end of 2012.
Ultimately, the fixed line market will stay relatively small in Indonesia,
though it will be lucrative since this is where the high-revenue customers
congregate. It is a segment where tech startups can thrive, especially in the
B2B sector, but the headline action will remain in the mass mobile consumer
market.

The internet market in Indonesia is now in a rapid growth

phase, driven on the demand side by increasing middle
class wealth and driven on the supply side by the intense
focus of the mobile operators on increasing data
subscribers. This is a mobile-first market: of the 125 million
internet users forecast in 2015, the vast majority will only
ever access the internet via their smartphone, tablet or –
even in 2015 – their feature phone.
70 million new internet users by 2015
Growth in Indonesia’s internet sector is accelerating, with consensus
forecasts predicting that the number of internet users will grow from 55
million in 2012 to 125 million in 2015. So from a user base that is already
larger than Korea’s, the growth rate in Indonesia will exceed 30% per annum
for the next five years.
Three key fundamentals underpin the coming sustained period of growth:
• Economic growth is robust and consistent at around 6% per year, and
personal spending levels are currently rising by over 10% per year.
• The middle class in Indonesia is growing rapidly, bringing with it strong
demand for technology devices and online services.
• Intense competition between the mobile companies is pushing prices down
and also raising consumer awareness through mass market advertising
campaigns.
Upside scenario of 150 million users by 2015
Even so, we believe most market forecasts are underestimating future
growth, and are not taking into account two of the key dynamics of the
Indonesian market – that growth suddenly accelerates when key price points
are achieved, and that the mobile operators are going to push mobile data
like crazy as one of the few ways they can achieve sustained revenue
growth.
We therefore believe that there is a high probability of an upside scenario,
with the internet user base reaching 149 million users by 2015:
Supporting the argument that Indonesia’s potential is currently being under-
called are the higher internet penetration rates in other countries around the
region. So while Indonesia currently stands at 24%, the Philippines is
already at 33% and Vietnam at 56%. Even if Indonesia reaches the 150
million internet users of the upside forecasts, that would still be below
Vietnam’s penetration rate today.
Positive changes in user demographics
Not only is the user base growing rapidly, the profile of the typical internet
user is changing too. Within the user base, a big shift in the age of users is
currently underway. Traditionally the internet base in Indonesia has been
dominated by the under-25s, leading to music, entertainment and social
media being the most popular uses.
Starting in 2011 the 25-50 age group begin to play catch-up, and has grown
so quickly over the past two years that the user base is now relatively evenly
spread across all age groups. This has led to the rapid expansion of more
lucrative online services such as e-commerce, travel services and online
banking.
It’s not all about the high spenders
We are big believers in the power of market segmentation for tech
companies as a means to extract maximum market value from limited early-
stage resources. Indonesia has a segment than many overlook, and it happens
to include more than 100 million users: internet access via mid-level mobile
phones.
2G and 2.5G mobile phones are still a huge chunk of the market in Indonesia
(around 75% of all handsets), and many users in Indonesia use a feature
phone browser to access the internet, messaging, information and
entertainment services.
So the internet sector is about much more than delivering digital services via
broadband and 3G to PCs, laptops, smartphones and tablets. It’s also about
much more than targeting e-commerce services at credit card holders.
Is there any money to be made? Ask mig33, a social network for feature
phones. They have 40 million users in Indonesia with an average monthly
revenue of US$3 per month.
So although smartphones have quickly grown to 15% of the mobile market,
it is important to recognise that there are still over 150 million feature
phones in use. Many of these users are part of the middle class consumer
market, and this segment represents both a large market for digital services
and a very significant advertising market.
We think mig33 won’t be the only US$100m+ company in the lower levels
of Indonesia’s very large pyramid.

Smartphone users in Indonesia - additional information

In 2013, an estimated 24 percent of mobile phone users in Indonesia owned

a smartphone and this figure is projected to more than double to 53 percent
by 2017. The number of mobile phone users in the country stood at around
173 million in 2013 and will rise to over 195 million people by 2017. This
means that a projected 103.5 million people in Indonesia will own a
smartphone in 2017, equivalent to 37.5 percent of the entire population.

As of December 2014, the most popular mobile operating system in

Indonesia was Android, with the Google-backed OS holding a market share
of just under 60 percent. Its closest competitor was Series 40, used in Nokia
phones, which held a share of around 10 percent. Although Apple’s iOS is
the second most popular smartphone operating system worldwide, it held
just a 3.85 percent share of the Indonesian mobile market at the end of 2014.

An increasing number of people in Indonesia are using their mobile phones

to access the internet. In 2013, mobile phone internet user penetration in the
country was at 22.8 percent and this is expected to almost double to 45.3
percent by 2018. Some of the most popular online services amongst mobile
internet users in Indonesia were Gmail, Yahoo Mail, and BlackBerry
Messenger (BBM). BBM was the preferred mobile messenger app of
smartphone users in the country in 2014, with 76 percent of users stating that
they used the service to message friends.